Timely tax-saving tips and strategies

Tax tip #3

Deducting personal expenses on S Corporation return instead of on 1040
 

If you deduct some personal expenses on your S Corporation tax return instead of on your individual tax returns, you can reduce the amount of salary you’d have to pay yourself as an employee-owner of the corporation. This in turn will reduce the amount of FICA tax you’ll have to pay.

As an officer, you’re required to pay yourself a reasonable salary if you pay yourself from the corporation. What’s considered reasonable varies according to several factors. Read the document [link: http://www.irs.gov/newsroom/article/0,,id=200293,00.html] Wage Compensation for S Corporation Officers on the IRS website for more information.

By reducing your S Corporation income by deductible personal expenses, you can pay yourself a reasonable salary from the remaining income. The salary would then be subject to FICA. However, the amount of salary subject to FICA will be less than if you paid it from the entire corporate income. In this way you’ll pay less FICA tax. And the personal expenses that you deduct won’t be subject to FICA.

For example, let’s say your S Corporation net income for 2011 is $100,000 before paying the shareholder-employee wages, and the corporation pays the following personal expenses on your behalf (which aren’t included in calculating the $100,000 net income):
 

• Health insurance          $10,000
• Self-employed SEP          5,000
• Donation to charity         5,000

Total                             $20,000

After deducting the $20,000 from the $100,000 net income, the corporation can pay you wages of up to $80,000 without incurring a loss. If the above expenses weren’t deducted by the corporation, but on your personal tax returns, you’d have to pay yourself wages of up to $100,000 to cover the $20,000 in personal expenses deducted on your personal returns. The additional FICA tax you’d have to pay would be $2,260 ($20,000 x .0565 x 2).

Note that contributions to your IRA by the S Corporation can only be deducted as salaries and wages. You’d then have to pay FICA tax on that amount, so you wouldn’t be saving money.

This is an idea that I learned about from reading an article by Stephen L. Nelson, CPA called “S Corporation Tax Saving Tips” at http://stenel.wrytestuff.com/swa439273.htm. 

Please be aware that this strategy shouldn’t be abused by paying non-deductible personal expenses with corporate funds and deducting them on the S Corporation’s tax return. I’ve seen small business owners commingle funds in this manner. It can cause you to have to pay interest and penalties should the IRS audit your tax returns. It can also result in your business being valued for less money should you wish to sell it. If the corporation pays such non-deductible personal expenses, such as for transportation and rent, you should reimburse it as soon as possible, preferably within the year the payments are made.

Timely tax-saving tips and strategies

Tax tip #2

by Gary Krupa, CPA
 

Securities trader vs. Securities investor

Significant tax advantages are available if you qualify as a trader of securities rather than as an investor in securities. Trading would enable you to report trading activities as if you were conducting a business even if you buy and sell securities for your own account.

• You wouldn’t be limited to deducting $3,000 in losses per year on securities transactions, as you would be if you filed Schedule D Form 1040 as an investor;

• Interest expense and other investment expenses would be deducted directly from Gross Income, rather than from Adjusted Gross Income on Form 1040. This means they’d be deductible even if you take the Standard Deduction rather than itemize your deductions.

• You wouldn’t pay self-employment tax on gains and losses from selling securities, as you would on other business income greater than $434. 

This is why “trading” and “investing” are not synonymous at least as they relate to the tax law.

More information, including how to qualify as a securities trader, can be found in:

• Tax topic 429 on the IRS website, http://www.irs.gov/taxtopics/tc429.html

• IRS Publication 550 “Special Rules for Traders in Securities”, on the IRS website or at http://taxmap.ntis.gov/taxmap/pubs/p550-029.htm

It may not be easy to qualify as a trader in securities. Read this Forbes article that explains how difficult it was for one individual to qualify as a trader, even though he was involved in high dollar-volume activity buying and selling securities: http://www.forbes.com/sites/peterjreilly/2011/07/11/trader-in-securities-status-difficult-to-attain

Timely tax-saving tips and strategies

Tax tip #1

by Gary Krupa, CPA

Deducting medical expenses and real estate taxes paid by someone else

If you read the IRS instructions for filing Schedule A form 1040, you’ll discover that you can only claim a deduction for medical expenses and real estate taxes you paid. In IRS publication 502, it says “You cannot include medical expenses that were paid by insurance companies or other sources.”

However, in a 2010 Tax Court decision, a daughter was allowed to deduct medical expenses and real estate taxes that her mother paid on her behalf. The daughter wasn’t eligible to be claimed as a dependent by her mother. The Tax Court ruled that the payments were to be considered as a gift made directly to the daughter, and then paid by the daughter to the medical service providers and County Treasurer. The facts of the case supported this treatment. For the complete article, including mention of the gift tax exemption and the Tax Court memorandum, visit this web page: http://www.smartmoney.com/taxes/tax-policy/free-lunch-deducting-expenses-you-never-paid-1316547708569/?link=SM_clm_sum#article_tab_article

Thus if someone is willing to pay your expenses in this manner, they're not just helping you meet your obligations. They're helping you save money by causing you to pay less in taxes, too.

Should you then decide to pay that person back, you should call it a gift, just because their payment was treated as a gift – it’s quite okay to exchange gifts. If you pay them their share of the tax savings too, that can be considered non-deductible personal interest. I recommend that if you pay them back, that you pay their medical expenses and or real estate taxes (if they have them). That way, they avoid having to apply such payments to the annual gift tax exclusion of $13,000, so that the exclusion can be available for other gifts.

Applying for a Federal Grant Shouldn't Have to Be So Hard!

By Gary Krupa, CPA

After all, what's a life, anyway? We're born, we live a little while, we die. A spider's life can't help being something of a mess, with all this trapping and eating flies. By helping you (Wilbur), perhaps I was trying to life up my life a trifle. Heaven knows anyone's life can stand a little of that.

- Charlotte's Web, p. 154

For some time I've been aware of a federal grant program that offers incentives to businesses making use of solar and other alternative energy (aka renewable energy) technology. The program is called the (Section) 1603 Program: Payments for Specified Energy Property in Lieu of Tax Credits. It’s proving very popular in the cities, but is less well known in rural areas. I offer to help companies apply for and receive the grant. 

For example, this grant program requires an "accountant's certification" for grant requests of $500,000 or more, a service which I’m well-qualified to provide. A few weeks ago, I contacted a solar energy contractor in Phoenix to help them obtain the grant on behalf of their commercial clients. The company encountered considerable difficulty with the grant process on their clients' behalf.

The process of applying for the grant is somewhat complicated and this business lacked the staffing needed to properly apply for the grant. What should have been a two-month turnaround ended up taking ten months (for a relatively small amount of money) in one case, and over a year in another. A big part of the problem, their Project Manager informed me, was being unable to communicate directly with a Government representative concerning the progress of the grant application. Their cash flow was compromised, and they experienced considerable frustration. Consequently, they vowed not to apply for this grant again.

To better assist them and other potential clients having this kind of problem obtaining the grant, I volunteered to contact the federal agency to learn more about the application process. I called the department responsible for the grant program and spoke with a representative without any difficulty. The representative explained what appeared to her as the reason for the delay this company experienced. Since she couldn't provide confidential information, she gave me an e-mail address that the client could use to contact an appropriate department representative directly and receive a quick response. She informed me that 19,000 grants were awarded for this program within the last two years. When a complete application was submitted, many applicants received their grant within two weeks. 

Based on this information and my prior experience contacting the department, I came to understand that this company's experience with the grant process wasn't typical. I sent the company an e-mail the next day with the information I obtained from the department representative.

This is a story I hope that many will learn from, particularly those who are applying for a Federal grant such as this one or those who had a similar experience.

To successfully receive the grant in a timely way, it’s important to totally understand the application process. The solar energy company's client made a few mistakes in their application. It’s also important to make contact with the right government employee and ask the right questions. I really appreciated the clear, helpful answers I received.

Because I'm accustomed to navigating through detailed processes and government agencies, this isn’t difficult for me. But for a small business, this task can be daunting - especially when you're understaffed - and who isn't these days?

What you can do is be patient, careful, and thorough. If you encounter any roadblocks with the details, call me. The more I learn about this particular federal program, the more I see the potential benefits for alternative energy companies.

However, please be aware that this program expires at the end of this year, so don't delay in applying or encouraging your clients to apply! It's an excellent program for helping to fund renewable energy projects, and the requirements are relatively straightforward. 

Saving Money by Not Hiring an Accountant Can be Expensive

By Gary Krupa

I’ve become aware that there are organizations in the Verde Valley, where I have my accounting practice that will not hire an accountant to help with their accounting or taxes. This has mostly to do with the cost of hiring one. Accounting services for these organizations aren’t considered necessary, except for preparing their year-end tax returns. Even then, many small “mom and pop” businesses use tax software to prepare it themselves, to avoid the cost of hiring an accountant.

I’ve done accounting or auditing work for a few clients who had their financial statements prepared or reviewed by a professional only occasionally or not at all. I’ve noticed that these clients made several substantial bookkeeping or accounting errors. In the event of a tax audit or when applying for financing, these errors may have proven to be costly.

Here’s an analogy that may serve to emphasize the importance of hiring a competent accounting firm:

My wife and I visited a car dealer in Phoenix in mid-January of this year to test drive a Honda Civic Hybrid. The dealership is located on a lot many miles from Highway 17 on Bell Road. There’s no modern-looking dealership building as I’ve seen in California and elsewhere in Phoenix. This one looked like a low-budget operation. Our salesperson told me by phone before we left home that a Carfax report would be provided.

The car handled well and I liked the way it drove. The sales representative was very friendly, although 1) he didn’t appear to know much about hybrid cars, and 2) he spoke a lot about his daughter in China. The dealer, however, used a high-pressure approach to get us to buy the car. When I asked him for the Carfax report, he replied that we could only see a history report if we committed to buying the car. The salesperson said it was because it cost the dealer too much: $49. This to us was a red flag. How could we have confidence in a car we’d be paying over eight thousand dollars for, if we couldn’t review its ownership and maintenance history before we agreed to purchase the vehicle? I suggested to the salesperson that the $49 cost could be spread out over several potential customers, but the salesperson turned a deaf ear to my suggestion.

We visited two other car dealers that day, in what became a stressful and exhausting experience. We finally purchased a lovely 2006 Honda Civic at a good price from a dealer located closer to Highway 17 on Bell Road. The dealership is in a modern building, the service was professional and every desk had a computer on it. The dealership even has an “Internet” department. And the Carfax report? It was made available to us online, even before we visited the dealership.

Here’s the moral of that story for me: if you want to have a successful organization, don’t skimp on services that’ll be worth much more to you than what you pay for them. In the above example, the first car dealer lost a probable sale due to his lack of professionalism and tight-fisted attitude. Similarly, many people avoid hiring a professional to save money. If you do without hiring an accountant, the mistakes you or your bookkeeper make may come back to haunt you. You may think of it as you would an insurance policy.

Here are at least three reasons why I recommend hiring me as your accountant:

• I’m very good at accounting, auditing, taxation, computer technology and problem solving. 

• I want to see my clients succeed, for their sake as well as mine.

• I want to help them solve their financial problems.

Volunteer vs. Employee - which is better from an organization’s point of view?

By Gary Krupa, CPA

When is it more advantageous to fill a position with a volunteer rather than with an employee?

There are no simple rules to determine whether an employee or a volunteer would be best suited for a particular assignment. There are, however, general guidelines that should be followed when deciding which path is best. Neither a volunteer nor an employee should be given the assignment simply because the supervisor likes that individual.

Here are factors that bear on the cost-effectiveness of volunteers vs. employees:

• Employees are generally better qualified than volunteers to perform specific tasks. The more specialized or advanced the skill the organization needs, the more valuable that skill is. It’s then more likely that the organization will have to hire an employee than rely on a volunteer to perform that task, unless the organization is willing to invest time and money training the volunteer.
• An employee is more likely going to stay with his or her employer longer because it’s difficult for him or her to find another job that pays the same or a higher salary.

•  An employee is more likely going to leave an employer to obtain a higher salary, a better working environment, or for career advancement.

• A volunteer is more likely going to stay with the recruiting organization longer because the volunteer identifies with the organization’s mission.

• When deciding whether to use a volunteer or hire an employee, an organization would be wise not to consider a volunteer’s contribution as inherently inferior to an employee’s. Volunteer labor isn’t simply “free labor”. The volunteer provides a valuable service to the organization. The volunteer gives the organization the benefit of his or her energy, experience and know-how without causing the organization to incur additional payroll costs. A volunteer may be just as qualified to do a job as an experienced professional employee. For example, business executives and CPAs have served as volunteers on Boards of Directors.

Thus, to determine whether to hire an employee or recruit a volunteer, the organization must consider several factors, including but not limited to the worker’s qualifications, attendance record, compatibility with the organization’s values or mission, how well the applicant or volunteer relates to the supervisor, and the organization’s budget. If the organization is a non-profit, the staff member should also have an eagerness to serve the community. The determination should be made on an individual basis.

However, an organization may wish to have a comprehensive policy regarding the use of volunteers vs. paid staff members. The policy can include general recommendations for volunteer recruitment and for determining whether to fill a position with a volunteer or paid staff member.

Why I'm publishing this accounting newsletter

The goals of this newsletter are to:

1. Promote my accounting and tax services
2. Help you understand accounting, auditing and taxation better, or make these topics less intimidating
3. Provide timely information that will help you make better financial decisions
4. Save you time and money and
5. Communicate better with my clients and prospective clients about accounting and finance.

A considerable amount of time and effort is required to publish an effective newsletter. Many accountants don’t believe they’ll gain many new clients in return for such an investment. They prefer to promote their services in other ways – for example, by networking, having websites or blogs, or buying accounting practices.

That’s why I gave the newsletter idea serious consideration before deciding to publish one. The ability to communicate more pro-actively with prospective clients than waiting for them to visit my website was probably the deciding factor. Since I like to write and design layouts, newsletter publishing is an activity I enjoy.  

It doesn’t mean, however, that I don’t market my services in other ways besides publishing this newsletter. I’ve used traditional methods, such as networking and my website, in addition to soliciting by telephone.

This newsletter is also a great way to keep my clients informed about accounting and tax matters that affect them, such as tax law changes and new accounting standards.
 

Despite the severe recession we find ourselves in, it’s important for all of us to make full use of our talents. That will enable each of us to stimulate the economy and help the environment in our own way.

Why my accounting newsletter looks and sounds the way it does 

For a long time I've wanted to create an image that's more interesting - in computer terminology, less grayscale - than the images adopted by other accountants. Accountants have generally let their work speak for them, while tending to blend into the background in some ways. This has inspired their clients' confidence. After all, managing someone else's money should require a conservative, demure demeanor, at least during working hours. It’s also the nature of financial reporting to report transactions and events conservatively. 

Projecting a conservative image is a principle I fully agree with. However, I don't see why we accountants can't communicate in a more interesting way with those we do business with, and with other members of the public. That would make it easier for us to get our ideas across. It may also cause prospective clients to view us less as dullards, and more as people they can easily relate to, and whom they can trust to manage their financial resources. To put it briefly, a newsletter like this one is designed to make an accountant like me more worthy of hiring in a client’s eyes.

This newsletter expresses who I am, what I have to say, and what others have to say, but in a professional manner. If you look at my website, you'll have to agree that it, too, is more distinctive than many accountant websites. The images in this newsletter aren't as colorful as those featured on the MailChimp website; there you'll see a banana split, a microscope and a flying saucer, for example. Nonetheless, what I've done with the design of this newsletter apparently goes outside of the traditional accounting newsletter framework.

From a philosophical point of view, what I’ve read had to be interesting, or I wouldn’t read it; so it’s appropriate that any newsletter I publish should be interesting. Yet this newsletter isn’t just interesting; it’s informative as well. In that way it reflects my curiosity and desire to stay informed about events that matter.

As concerns the newsletter format, you’ll notice that it employs a multi-column format. That’s because my objective is to reduce the amount of scrolling with a mouse necessary to read the articles. Ideally I’d like for you to be able to see the entire newsletter in one glance, or at least with a minimum of scrolling required to view the entire newsletter. I’ve received newsletters from other professionals that present the information in one column, which means that you have to scroll down the page to read the entire newsletter. The more content there is, the more you have to scroll. I found that the amount of scrolling I did online, or in a virtual document, thus became somewhat tedious on a cumulative basis. An analogy to this in the physical world would be the continuous unrolling of a parchment – probably the ultimate example would be the Jewish Torah. I’m trying to make my virtual newsletter more concise and less tiresome to read.

To determine whether I’m meeting those objectives, I pasted the contents of this newsletter, not including the footer section, into an MS Word document. It took up three pages, compared with four pages for newsletters that I received from three other professionals. I’ll try to reduce this newsletter’s length to one page if I can, without sacrificing the quality and quantity of the content.

Similarly, when an article is longer than a few sentences, as this one is, you’ll be able to read the beginning of it in the newsletter and the rest of it on my blog. This approach saves bandwidth and space on your computer’s hard drive.

The way the articles are written, too, differs from the style used in other accounting newsletters. That's due to the influence of my two former newsletter publishers, Joyce K. and Roger W., whom I affectionately call my newsletter "professors". They persuaded me to write in a more informal style than the way I’m used to writing, and to tell a story or use a personal anecdote when writing about a certain topic.

The effort to come up with the most interesting, the most effective way of writing what I wish to express is a challenge. Coping with that challenge helps prevent this newsletter from being dry and ordinary.

Should I come across another accounting newsletter that attracts more readers, I may wish to write articles for it. I may even abandon this publication if I find another that’s more suitable for communicating accounting and tax information.